Franchising: A Good Way To Go? (long)

Recently, some fellow business students and I have been talking about the possibility of opening a fast-food franchise (and hopefully more than one) in the near future as a low-risk workhorse business to build up some capital for moving on to bigger and better things. While we are all smart and talented people, you see, we are short on cash.

Unfortunately, our efforts have run into serious issues and I'm pretty skeptical that it will ever get off the ground. So I figured I'd start a new thread to discuss the problems we've run into and see if anyone has any good advice.

We started off by looking into Subway, which as you may know is one of the cheapest and simplest food franchises. Startup costs very from $85k to around $250k, with an average location being around $130k. Doctor's Associates Inc. (which owns the Subway formula) has contacts with some financing groups that can (depending on many factors of course) provide startups with up to 100% of the start-up costs with loans up to 84 months (7 years).

Now the bad news: the Subway people around the L.A. area have not been very helpful. Apparently they are in no particular hurry to expand operations here. One person we know who is starting her own Subway has been working on it for three years and just now finally got location approval. And hers is way out in the California desert.

The way it apparently works is that existing franchisees in the area get a kind of right of refusal; they can just say, "no, we dont want anyone else opening Subways in our area" and you're screwed. Once you finally find an area where existing franchisees don't object, you have to get location approval; you pick a spot, and the Doctor's Associates Inc. people come out, investigate, and probably tell you to try again. Oh, and once you do have a Subway open, it is a mandatory minimum five year wait before you can open another.

So, having been discouraged on that front, we began looking into other franchises. For example, Cold Stone Creamery. However, that didn't pan out well either. It seems that most of the major franchises are halting development in the L.A. area because they have decided the saturation is already good enough.

So, where we are now is considering franchises that are new and undeveloped, and ones that don't have any stores open in this area. The upside is that it will be easier (we presume) to get a franchise from them. The downside, of course, is that you don't benefit from the marketing and name recognition that the major chains provide. It's a lot more like starting your own business from scratch, and you can't expect nearly the same support.

Having looked into the franchise world a bit, I've also begun to think there are some problems with our entire approach. There are four of us working together on this, and we were thinking of forming an LLC or LLP and splitting the profits evenly. However, almost all franchise restaurant stuff seems oriented toward individual owners. Also, none of us have real experience in the fast food or restaurant industries, and a lot of these companies understandably prefer people with at least a couple years of restaurant management experience. Finally, owning a business like this isn't really a dream or goal of any of us, it's just a business opportunity, and I am not sure there is real commitment to this idea in particular.

So, anyone who has experience in managing or owning franchises, what would be your advice? We're not stuck on food, either; other franchises would be worth looking into as well. But, do you think that it's worth pursuing, or should we look at other business opportunities? Is running a franchise operation easy enough that people without much experience could figure it out, or difficult enough that owners really ought to have experience? Is franchise ownership a reliable and low-risk way to generate some revenue for other business opportunities or is it more of a living income for a single owner? Any insights would help!

I wish I could offer advice on the business side, but if you are looking for franchise ideas, you might consider Backyard Burgers. They are small, have great food, and seem to be looking to grow. They say they provide a 2-month course in running a restaurant, though I have no idea how useful it would be. They don't have any restaurants west of Texas, though. I'm not sure how much of a good or bad thing that is.Backyard Burgers

First off, as a fellow business student (with an assload of experience in food service), I would respectfully remind you that you shoudl perform a basic SWOT analysis on yourselves, find what your major strengths in experience, expertise and common interests are, THEN pursue the opportunity that you determine will be your most profitable and successful franchise.

If none of you have any real interest nor experience in food service, then I would highly advise against a Subway franchise, especially if they have determined that your market area is not one in which they have no real desire to expand. That decision is more than likely based upon their market research and situational analysis, one that probably says that your area is saturated with fast food and is not a viable option at this time.

In fact, if youse guys are in any way geek inclined (why else would you be posting on Ars? ), I would suggest something like Geeks On Call. However, as with most franchise opportunities, this company insists that you assume some of the investment risk by fronting about 56K for startup, advertising, training, supplies and including 16K in startup working capital. Then, there's a $250 per week advertising fee, and an 11% annual royalty from gross service revenues.

Look into Jimmy Johns. They are a HUGE hit out in the midwest on college campuses. They deliver FAST and LATE (around 3-4am) which makes them the perfect fit for universities.

When I first got here in 1999 there was one store. Now there are 4. There are about 50 in illinois alone. Every major college campus in the big ten probably has three of these minimum, and they rake in the dough (ha!)

Problem is that they require 300k in assets to become a franchisee.

Perhaps you could also look into Penn Station subs.

But I can tell you this, if I had 300k in assets I'd be opening a jimmy john's place out west. This crap basically sells itself out here. The only problem I see is if there are already some established good sub places (read: NOT SUBWAY (sucks ass)).

If you come into a subway-only market you could probably literally wipe them out with this place. I've seen at least one of the two or three subways here go out of business (ON A COLLEGE CAMPUS) in the past few years.

I would think that your central belief that a fast-food franchise is "a low-risk workhorse business" is fundamentally flawed. New restaurants fail at a mind-boggling high rate; I think that starting a new restaurant of any kind is an exceptionally risky endeavor. Even if being a franchisee mitigates some of the risk, it's not going to ever be "low-risk". Secondly, every restaurant owner that I know works his butt off. If this isn't something that you are passionate about, do you really see yourself putting in the long hours required to make this succeed?

Check out raising canes(www.raisingcanescom). All they sell is these great tasting chicken fingers, special sauce, and sweet tea. This company has grown 500 percent over the past 6 years. It's freakin awesome. The CEO of the company is a true rags to riches story. He couldn't get ANY money from anyone, including banks. They all laughed at him. So, in order to raise money he worked in alaska on the crabbing boats. He raised enough money to start a small storefront near LSU in Baton Rouge, LA. Over the next 6 years he has grown to over 20-30 locations. They are going to start Franchising soon. If I had the personal finance requirements, I'd do it. If you have the money, I'd suggest going after this Franchise opportunity! If you open one and are looking for regional managers, I'm available. :-)

It sounds like you've done your homework, enough to get the details and some anecdotal evidence about how hard foodservice is.

Unless you absolutely love foodservice, I'd not think this is your best business opportunity. For one thing, if you open up a Subway or its equivalent, you could count on working as a sandwich artist for many hours a week. The reason why Subways are cheap to open is because of their smallish revenue stream, with little opportunity for meaningful revenue increase for 5 years. Paying someone to work in the store would be a significant drain on an already slim margin.

Even if you didn't go with Subway, I still don't think foodservice sounds like your cup of tea. If you had liked it, one of you would have probably already gotten some industry experience.

So based on that alone, I'd not recommend it for you. If it really were easy to make money franchising in new locations, there'd be no such thing as franchising because the franchisor would simply own all of the locations outright.